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Employer's Tax Papers

One Big Beautiful Bill Act – No Taxes On Overtime

5 minutes

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) became law and brought significant changes to employment-related tax obligations. This article focuses only on the OBBA’s provisions concerning “no taxes on overtime,” and the impact of these changes on employers.

Frequently Asked Questions For Employers

The frequently asked questions do not cover all potential legal issues. Employers should consult with their attorneys, accountants, and tax advisors to ensure their compliance with the law.

What does “no tax on overtime” really mean?

Beginning with the 2025 tax year, employees may deduct a certain amount of “qualified” overtime from their federal income tax. This law does not impact the amount of wages that an employee earns or an employer’s obligation to pay wages timely and in full, including all earned overtime wages at the overtime rates set forth in employment agreements and/or employment policies.

Further, the OBBBA does not apply to any state or payroll taxes. The deduction applies only to federal taxes.

What is “qualified” overtime under the OBBBA?

Employees may deduct the premium portion of overtime earned in accordance with the Fair Labor Standards Act (“FLSA”). The FLSA requires employers to pay “time and a half” to non-exempt employees for all hours beyond 40 hours in a single work week.

This means that where an employee works more than 40 hours in a week, the employee can deduct the “half” portion of “time and half” for the overtime hours. For example, if an employee earns $40/hour and works 45 hours in a single week, that employee will earn $60/hr for hours 41 through 45 of that week. That employee can then deduct $100 from their federal income taxes related to that week (5 overtime hours x $20, which represents the premium portion of “time and a half”).

What categories of overtime are not “qualified?”

If by agreement or pursuant to state law, an employee earns more than “time and a half” for their overtime hours, the overtime above “time and a half” is not “qualified” for the deduction. This includes the following overtime pay arrangements, for example:

  • Double time
  • Shift pay differentials
  • Overtime for more than 8 hours worked in a single day on a prevailing wage projectThe employee’s “time and a half” hours can be used to calculate the deduction. Importantly, employers must pay employees for all overtime wages earned. The OBBBA only concerns the amount of overtime that the employee can ultimately deduct.

What are employers’ obligations under this law?

Employers are obligated to account for employees’ “qualified” overtime hours and provide that information to employees in their W-2s. This may require employers to collaborate with payroll providers and/or develop internal policies and procedures to not only account for standard overtime hours worked, but also for the “qualified” overtime hours for tax purposes.

For tax year 2025, the IRS has announced that it will not revise form W-2 to capture this information. Further, employers will not face any penalties if they cannot provide employees with information concerning their “qualified” overtime hours. However, employers are encouraged to act in good faith to assist employees with calculating and gathering this information to the extent possible.

For tax years 2026 through 2028, employers will have an affirmative obligation to collect and provide employees with their “qualified” overtime hours for tax reporting purposes. The IRS has issued a Draft W-2 for 2026. The OBBBA does not include any specific penalties for employer non-compliance. However, non-compliance would create risks related to wage and hour compliance and pay equity issues.

For how long will the “no taxes on overtime” provisions be in force?

For now, employees may deduct “qualified” overtime for the tax years between 2025 and 2028, inclusive. Congress has the authority to extend this provision beyond 2028.

Is there a limit for employee deductions of “qualified” overtime?

Yes. The OBBBA provides the following deduction limits:

  • $12,500 for employees filing as single
  • $25,000 for employees filing as married filing jointly

For employees filing as single, the maximum deduction decreases by $100 for every $1,000 an employee earns over $150,000. For employees filing as married filing jointly, the maximum deduction decreases by $100 for every $1,000 an employee earns over $300,000.

What should employers do to comply with the law?

First and foremost, employers must remember that they remain obligated to pay employees for all hours worked and to comply with all overtime laws and agreements with employees.Further, employers should collaborate with their payroll providers to ensure that all information related to “qualified” overtime can be collected and disseminated to employees. Employers should also train human resources and payroll staff to create reports able to collect the necessary information and to notify employees about their rights under the law.

Lastly, employers should direct employees to their personal accountants and tax advisors when they raise tax-related questions to employers. Employers should not take on the responsibility of providing tax guidance to employees.

Cole Law Partners Can Help

Employers should not view their obligations under the OBBBA in isolation. Cole Law Partners’ employment lawyers understand the wage and hour implications of this new law. Employers with questions or concerns should contact us, and we will collaborate to identify risks in the employers’ policies and to develop solutions for compliance with the law.